ECHO OF THE TVA COMES OVER MUNICIPAL DATA NETWORKS

CAMBRIDGE, MASS.—So you don’t want to move to the
Coast, and you’re tired of hanging around your small town waiting
for a telecom or cable company to provide high-speed data access. Go
ahead and build your own network! Hundreds of municipalities have done
it. But legal challenges to the practice are also mounting.

Gainesville, Florida did it. According to Ed Hoffman of Gainesville
Regional Utilities, the city-owned electrical company, their data
network started as a critical piece of the electrical infrastructure.
Now they reach into several thousand homes.

The utility planned on using its network for purely internal
purposes, like controlling power flows and monitoring subsystems.
Bellsouth couldn’t offer the town enough capacity, and what it
offered was too costly.

So about five years ago the electric company partnered with the
local Shands Hospital, which needed a high-speed network for
transmitting patient data, to build 100 miles of fiber network serving
the city and parts of the surrounding county.

Using their extra capacity, they offered high-speed point-to-point
service to businesses and government institutions, followed by Internet
service to both institutions and residences. “There’s no
end to our capabilities,” says Hoffman.

Do private Internet providers complain about the competition? Once
in a while they do, but they also rush to link into the high-speed
backbone offered by the city network. Hoffman believes that the network
has improved the environment for private ISPs, all in all.

Tacoma, Washington tried every private angle possible before
building its own network. Like Gainesville, the electric company in
Tacoma wanted a high-bandwidth network that could read meters remotely,
pinpoint power failures during storms, and control power stations.

Steve Klein of Tacoma Power reports disdainfully that the local
phone company wasn’t even interested in looking at the financial
pay-offs from building the network. Their switches were designed for
short voice calls and tended to go down during critical transmissions
of data. The project didn’t fit into their business plans,
because it would require serious capital investment while they were
getting along fine milking their existing infrastructure. “As a
monopolist,” said Klein, “I knew of what I
speak.”

Next he tried the cable company. It was a mom-and-pop operation
taken over by TCI, which showed no desire to invest in improved
infrastructure. And while the competing telephone companies were
sympathetic, they were too small. “They were used to going down
the main highway signing up some large business nearby, not stringing
wires to a whole neighborhood.”

When Tacoma Power decided to build the network itself, it submitted
its plans to a consulting group at the Stanford Research Institute,
which pointed out that a small increase in investment could provide
enough extra capacity to let them lease out service.

The city-owned hybrid network (fiber backbone and copper to
residences) provided such a superior product to its competition that
Klein says “we have to take care not to grow too fast.”
Current Internet service uses a television screen and an attached
keypad, but it is unbelievably cheap at $9/month. And fast, at 128
kilobits with an increase soon to 256 kilobits. “My
infrastructure will pay for itself just meeting energy needs,”
boasts Klein. “The rest is icing on the cake.”

Klein does not want to expand his electrical company to be in the
market for all possible services a network can carry. So more
competition is coming soon, as network capacity will leased to any and
all interested ISPs.

Cities are well aware of their social impact when they build data
networks. Over and over I heard people say that their students, their
businesses, and their workers need high-speed Internet access. Mike
Thompson of Pioneer Internet in Iowa says bluntly, “If small
communities don’t invest in the technology to keep businesses and
provide the same educational opportunities as cities, these communities
will die.”

Glasgow, Kentucky is home to a passionate advocate of public
infrastructure, William J. Ray. Still bearing the old American pride in
the Tennessee Valley Authority, Ray says that municipal utilities are a
key part of what government is meant to do.

The goal of city-owned telecom networks, according to Ray, is the
same as that of municipal electrical utilities many decades ago: to
offer services priced way out of reach by the private companies price.
He refers to “cost-based rate versus market-based
rate”—in other words, the city provides a service at cost
instead of trying to make a profit. The Glasgow data network was in the
red for nine years, but last year for the first time it started to show
a profit.

The proponents of municipal networks I interviewed were united in
their disappointment over the 1996 Telecom Act. Its promised
competition never came—certainly not to those small towns with
the ill fortune to be classified as “third-tier
communities.” And so the movement to build municipal networks
takes on steam.

These networks are spreading like wildfire across the Iowa prairie.
Almost 40 towns and cities in that state have voted to build data
networks. The story I heard from the assistant town clerk of Hawarden,
Patty Anderson, was familiar.

The city council of Hawarden got “tired of hearing complaints
from residents” about phone service; her own phones were unusable
in a heavy rain. Businesses warned that they needed advanced
applications like videoconferencing; one with customers as far away as
Taiwan and Scotland said it would move out of town if they could not
get a high-speed data connection.

In October 1994, a special referendum to allow the building of a
communications network brought out 65% of the voters and passed with
96% of the ballots. The network offered cable before telecom. But they
made their first phone call over the municipal network on October 20,
1998—and were forced to shut down by the Iowa Supreme Court on
October 21.

The court ruled that an Iowa law enabling cities to build
“communications networks” referred just to cable TV, not to
telephony or data. They have since rescinded their decision, but
because they have not issued another ruling the phone service remains
disconnected.

Hawarden got caught in a nationwide struggle over the rights of
cities to offer telecom services—including Internet
service—on their networks, a struggle going increasingly to the
opponents. Most recently, Texas ruled against the cities, and the FCC
refused to step into the dispute; another case in Missouri has just
gone before the FCC.

Opposition does not seem to come from any anti-government
ground-swell among the citizens—after all, they’re the ones
voting to build the networks—but from telephone and cable
companies. When I heard how the schools had to shut down their phones,
I was ready to pick up a shotgun and join the good people of rural Iowa
in defending their networks. But at the receiving end of the barrel I
found not the cash-stuffed national monopolists I expected, but a group
of small independent operators.

Iowa, it seems, has more independent phone companies than any other
state. Judy Pletcher, a spokesperson from their representative body,
the Rural Iowa Independent Telephone Association, claims they are
state-of-the-art. The dissatisfied cities building municipal networks,
she says, are customers of big national companies.

There’s no dispute from Pletcher that national telephone
companies are leaving Iowa for more lucrative contracts. GTE has
announced that it’s selling all its local exchanges; U.S. West
sells a bunch of exchanges on a routine basis. But RIITA is picking up
the service and is convinced they can provide everything the cities are
doing for themselves.

RIITA’s opposition is typical of telecom companies. They
believe that cities are competing with them unfairly—by using
taxes, by avoiding the payment of taxes and fees private firms have to
pay, or by other kinds of cross-subsidy. Their complaints are
summarized by the call for a “level playing field.”

The most disturbing concern raised by Pletcher was that cities who
go their own way are making it harder for others to get service. What
about the even smaller towns and the rural residents who can’t
afford to build a network? Private companies, according to her, are
committed to serving everybody in the communities they enter.

Proponents of city networks deny that they’re using tax money
unfairly. Comparisons are very hard to make because the conditions
under which public and private companies operate are so different. As
Ray says, “Cross-subsidization is in the eyes of the
beholder.” Jim Baller, who represents many city utilities, says
“publicly-owned entities generally make payments in lieu of taxes
that are often higher than the taxes paid by private
entities.”

Baller points out that the criticism of city networks goes back at
least 80 years, when cities developing their own electrical grids were
lambasted by private utilities as “hotbeds of Bolshevism.”
He casts doubt on the whole “level playing field” debate as
being “like a debate over religion.” Instead, he wants us
to “ask ourselves, honestly and realistically, ‘How are we
going to ensure that all Americans promptly get the full benefits of
the Information Age?’”

Bellsouth spokespersons told me they are “in favor of
competition, including having municipalities enter our
marketplace,” and that, “As a policy, Bellsouth has no
objection to municipalities offering telephone service as long as
they’re regulated the same way we are and don’t use tax
money.”

In Kentucky, Bellsouth introduced a bill requiring cities to
collect the same fees private companies do, including a 6% state tax, a
3% school tax, universal service fund subsidies, and a lifeline service
subsidy. The bill was withdrawn, but will be reintroduced in the year
2000. Meanwhile, according to Bellsouth spokesperson Ellen Jones, the
phone company is talking with local town officials.

While the tax restriction may seem to be a show-stopper for public
facilities, cities have actually been able to work within it. The
Gainesville network, for instance, started paying property and sales
taxes a year ago, after Florida passed a law sponsored by Bellsouth and
other companies.

Most cities fund networks by floating bonds, and as shown in this
article, they are finding it quite feasible to pay off the bonds from
revenues. But even these bonds could be considered unfair competition
because they’re tax-free, says Iowa state representative Jack
Drake.

Drake is the representative who introduced the original bill that
Hawarden used to justify building its network. But Drake is a partisan
of the level playing field movement, and says his bill was meant to
apply only to cable TV service, just as the Iowa court ruled.

Luckily, he says, all parties are sitting down to talk out
differences, hoping to reach agreement and thus head off a ruling by
the court.

The true competitive advantage that cities have is size. They take
on the job of providing access to everybody at the same time, and they
can count on subscription rates of 80% or more.

But most of all, cities are committed to providing key services to
citizens. They have proven that they can jump in where private
companies dawdle.

Municipal networks invert everything we hear from free-market
propagandists about the stifling effects of government and the drive
inherent in private companies. If government was an enemy of
innovation, the city-owned utilities would never have even tried to get
into the data business.

Baller reprimands companies that support level playing field laws:
“I have a problem with keeping people from helping themselves
when you know you can’t help them.” And Ray scoffs,
“It’s OK for cities to build water systems or electrical
utilities, but we’ll draw the line at telecommunications
services.”

But eight states have passed laws limiting or prohibiting city data
networks. We will not really know the future of these enterprises until
we get a ruling on them from the FCC or the U.S. Supreme Court.

The day after this article was published, on February
17, Hawarden got its municipal phone service back. The Iowa Supreme
Court ruled that the Iowa law allowed municipal networks to offer
telephone service.

Member, Computer Professionals for
Social Responsibility
Editor, O’Reilly Media
Author’s home page
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